Connection (CNXN) Reports Second Quarter 2023 Results

Record Second Quarter Margin Performance; Industry Demand Remains Challenged

SECOND QUARTER SUMMARY:

• Net sales: $733.5 million, down 11.5% y/y
• Gross profit: $127.8 million, down 6.7% y/y
• Net income: $19.7 million, down 22.4% y/y
• Diluted EPS: $0.75, down 22.3% y/y
• Adjusted EPS: $0.80, down 17.2% y/y¹

Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading information technology solutions provider to business, government, healthcare and education markets, today announced results for the second quarter ended June 30, 2023. The company also announced that its board of directors has declared a quarterly dividend of $0.08 per share on the company’s common stock, which will be payable on September 1, 2023, to shareholders of record as of August 15, 2023.

“We executed well against our strategic plans during the second quarter. We are successfully transitioning our business, driving growth in integrated technology solutions and services across each of our segments, resulting in a 90 basis point improvement in consolidated gross margin. While we are seeing a continuation of the challenging economic environment, we are confident that our business plans remain well aligned with the shifting dynamics of how our customers deploy, utilize, and consume technology,” said Timothy McGrath, President and Chief Executive Officer of Connection.

Net sales for the quarter ended June 30, 2023 decreased by 11.5%, year over year. Gross profit decreased 6.7% while gross margin expanded 90 basis points to 17.4%, compared to the prior year quarter. Net income for the quarter ended June 30, 2023 decreased by 22.4% to $19.7 million, or $0.75 per diluted share, compared to net income of $25.4 million, or $0.96 per diluted share, for the prior year quarter. Earnings per share, adjusted for restructuring and other charges (“Adjusted Diluted Earnings per Share”), decreased to $0.80 cents per share for the quarter ended June 30, 2023, compared to $0.96 cents per share for the prior year quarter.¹

Net sales for the six months ended June 30, 2023 decreased by 9.6%, compared to the six months ended June 30, 2022. Gross profit decreased 5.7% while gross margin expanded 71 basis points to 17.1%, compared to the six months ended June 30, 2022. Net income for the six months ended June 30, 2023 decreased by 28.2% to $33.9 million, or $1.28 per diluted share, compared to net income of $47.2 million, or $1.79 per diluted share, for the six months ended June 30, 2022. Adjusted Diluted Earnings per Share, decreased to $1.36 cents per share for the six months ended June 30, 2023, compared to $1.79 cents per share for the six months ended June 30, 2022.¹

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) decreased 11% to $124.4 million for the twelve months ended June 30, 2023, compared to $140.5 million for the twelve months ended June 30, 2022.¹

Quarterly Performance by Segment:

• Net sales for the Business Solutions segment decreased by 20.5% to $261.0 million in the second quarter of 2023, compared to a record $328.4 million in the prior year quarter. Gross profit decreased by 6.3% to $61.4 million in the second quarter of 2023, compared to $65.5 million in the prior year quarter. Gross margin increased by 356 basis points to a record 23.5% primarily due to a shift in product mix to sales of datacenter products, including services, software, and networking, in addition to a higher mix of netted down revenue during the second quarter of 2023.
• Net sales for the Public Sector Solutions segment increased by 22.6% to a record $185.4 million in the second quarter of 2023, compared to $151.2 million in the prior year quarter. Sales to the state and local governments and educational institutions increased by 15.7% to $151.7 million, while sales to the federal government increased by 67.8% to $33.6 million, compared to the prior year quarter. Gross profit increased by 12.8% to $23.5 million in the second quarter of 2023, compared to $20.8 million in the prior year quarter. Gross margin decreased by 110 basis points to 12.7% primarily due to a higher mix of large rollouts of end-point devices in the second quarter of 2023.
• Net sales for the Enterprise Solutions segment decreased by 17.7% to $287.2 million in the second quarter of 2023, compared to $348.9 million in the prior year quarter. Gross profit decreased by 15.1% to $43.0 million in the second quarter of 2023, compared to $50.6 million in the prior year quarter. Gross margin increased by 46 basis points to 15.0% primarily due to an increase in software and services recorded on a net basis.

Quarterly Highlights

• Our Healthcare revenue grew 5% sequentially, driven primarily by customers investing in integrated workplace transformation solutions. In addition, demand for networking and collaboration solutions continued to be an integral component of patient care and the overall patient experience.
• Our commitment to providing exceptional customer service and supporting workplace transformation needs helped us to be named both the Microsoft US Surface Solutions Partner of the Year and Modern Work, Surface Hub Reseller US Partner of the Year for 2023.
• Our Technology Integration and Distribution Center completed a record number of custom configurations in the second quarter as customers demand for managed services has increased.
• Our Public Sector Solutions segment achieved record net sales to K-12 customers.
• The company generated record cashflow from operations of $116 million in the second quarter.

Quarterly Sales by Product Mix:

• Notebook/mobility sales decreased 19% year over year and accounted for 34% of net sales in the second quarter of 2023, compared to 37% of net sales in the second quarter of 2022.
• Accessories sales decreased by 23% year over year and accounted for 11% of net sales in the second quarter of 2023, compared to 13% of net sales in the second quarter of 2022.
• Networking sales increased by 44% year over year and accounted for 11% of net sales in the second quarter of 2023, compared to 7% of net sales in the second quarter of 2022.
• Software sales decreased by 10% year over year and accounted for 9% of net sales in the second quarter of 2023 and 2022.

Selling, general and administrative (“SG&A”) expenses decreased in the second quarter of 2023 to $101.0 million from $102.1 million in the prior year quarter. The decrease in SG&A was primarily due to cost reduction initiatives partially offset by on-going investments in our services business. SG&A as a percentage of net sales increased to 13.8%, compared to 12.3% in the prior year quarter. The increase in SG&A as a percentage of net sales is primarily due to the decrease in net sales.

In addition, the second quarter of 2023 results include $1.7 million of restructuring and other related costs associated with severance and other costs related to internal restructuring activities.

Cash and cash equivalents were $244.0 million at June 30, 2023, compared to $94.9 million at June 30, 2022. During the second quarter of 2023, the Company repurchased 49,538 shares of stock for $2.0 million.

Conference Call and Webcast

Connection will host a conference call and live web cast today, August 2, 2023 at 4:30 p.m. EST to discuss its second quarter financial results. For participants who would like to participate via telephone, please register here to receive the dial-in number along with a unique PIN number that is required to access the call. A web-cast of the conference call, which will be broadcast live via the Internet, and a copy of this press release, can be accessed on Connection’s website at ir.connection.com. For those unable to participate in the live call, a replay of the webcast will be available at ir.connection.com approximately 90 minutes after the completion of the call and will be accessible on the site for approximately one year.

Non-GAAP Financial Information

EBITDA, Adjusted EBITDA and Adjusted Diluted Earnings per Share are non-GAAP financial measures. These measures are included to provide additional information with respect to the Company’s operating performance and earnings. Non-GAAP measures are not a substitute for GAAP measures and should be considered together with the GAAP financial measures. Our non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. A reconciliation to the most directly comparable GAAP measures is available in the tables at the end of this release.

About Connection

PC Connection, Inc. and its subsidiaries, dba Connection, (www.connection.com; NASDAQ: CNXN) is a Fortune 1000 company headquartered in Merrimack, NH. With offices throughout the United States, Connection delivers custom-configured computer systems overnight from its ISO 9001:2015 certified technical configuration lab at its distribution center in Wilmington, OH. In addition, the Company has over 2,500 technical certifications to ensure that it can solve the most complex issues of its customers. Connection also services international customers through its GlobalServe subsidiary, a global IT procurement and service management company. Investors and media can find more information about Connection at http://ir.connection.com.

Connection–Business Solutions (800.800.5555) is a rapid-response provider of IT products and services serving primarily the small-and medium-sized business sector. It offers more than 460,000 brand-name products through its staff of technically trained sales account managers, publications, and its website at www.connection.com.

Connection–Enterprise Solutions (561.237.3300), www.connection.com/enterprise, provides corporate technology buyers with best-in-class IT solutions, in-depth IT supply-chain expertise, and real-time access to over 460,000 products and 2,500 vendors through MarkITplace^®, a proprietary next-generation, cloud-based supply chain solution. The team’s engineers, software licensing specialists, and subject matter experts help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

Connection–Public Sector Solutions (800.800.0019), is a rapid-response provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, publications, and online at www.connection.com/publicsector.

Cautionary Note Regarding Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), future liabilities, impairments, competition, and the impact of current macroeconomic conditions on our businesses and results of operations. You can generally identify forward-looking statements by words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “may,” “should,” “will,” or similar statements or variations of such terms, although not all forward-looking statements include such terms. These statements reflect our current views with respect to future events and are based on assumptions as of the date of this report. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

Such differences may result from actions taken by us, including expense reduction or strategic initiatives (including reductions in force, capital investments and new or expanded product offerings or services), our execution of our business plans (including our inventory management, our cost structure and our management and other personnel decisions) or other business decisions, as well as from developments beyond our control, including;

• substantial competition reducing our market share;
• significant price competition reducing our profit margins;
• the loss of any of our major vendors adversely affecting the number of type of products we may offer;
• virtualization of information technology resources and applications, including networks, servers, applications, and data storage disrupting or altering our traditional distribution models;
• service interruptions at third-partly shippers negatively impacting our ability to deliver the products we offer to our customers;
• increases in shipping and postage costs reducing our margins and adversely affecting our results of operations;
• loss of key persons or the inability to attract, train and retain qualified personnel adversely affecting our ability to operate our business;
• cyberattacks or the failure to safeguard personal information and our IT systems resulting in liability and harm to our reputation; and
• the rate of innovations in the hardware, software and services we offer as well as macroeconomics factors facing the global economy, including disruptions in the capital markets, economic sanctions and economic slowdowns or recessions, rising inflation and changing interest rates have impacted and are expected to continue to impact the level of investment our customers are willing to make in IT products.

Additional factors include those described in this Annual Report on Form 10-K for the year ended December 31, 2022, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. You should not place undue reliance on the forward-looking statements. Unless required by law, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made.

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^{1 Adjusted EBITDA and Adjusted Earnings per Share are non-GAAP measures. See page 10 for the definition and reconciliation.}

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